In the world of mid-market M&A, the headline number—the “sticker price”—is often the least reliable indicator of a founder’s actual exit success. At David Mayfair, we frequently see sellers captivated by a $30M offer, only to realize that after taxes, escrows, and aggressive earn-out structures, the “walk-away” wealth is lower than a $22M all-cash bid.
Understanding the architecture of a deal is about shifting your focus from Gross Enterprise Value to Net Liquidity. —
The Anatomy of the Capital Stack
A sophisticated buyer—particularly Private Equity—rarely writes a single check for the full amount. They build a “stack” designed to mitigate their risk and align your future incentives with their IRR (Internal Rate of Return) targets.
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Cash at Closing: This is the only guaranteed number. For a high-quality asset, we aim for 70–80% upfront. Anything less usually signals a buyer who is over-leveraged or skeptical of your company’s durability.
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The Earn-Out (The “Bridge”): This is a contingent payment based on future performance. While it can bridge a valuation gap, it is effectively a “bet” you are making on a company you no longer fully control. We look for “top-line” earn-outs (based on revenue) rather than “bottom-line” (based on net income), as the latter can be manipulated by the buyer’s new corporate overhead.
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Rollover Equity: In many mid-market deals, the buyer will ask you to “roll” 10–20% of your proceeds into the new entity. This isn’t just a reinvestment; it’s a vote of confidence. If the buyer is a Tier-1 PE firm, this “second bite of the apple” can often be worth more than the original cash payment five years down the line.
Net Proceeds vs. Enterprise Value
The “Sticker Price” does not account for the friction of the transaction. Before you celebrate a valuation, you must calculate the Waterfall:
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Working Capital Peg: Buyers expect a “normal” level of working capital to stay in the business. If your accounts receivable are lagging, that comes directly out of your pocket at the closing table.
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Indemnification Escrows: Typically, 10% of the purchase price is held in a third-party account for 12–18 months to cover potential breaches of representations or warranties.
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Tax Characterization: There is a massive delta between Capital Gains and Ordinary Income. A deal structured as an “Asset Sale” might be great for the buyer’s depreciation schedule, but it can trigger a double-taxation event for the seller that destroys 20% of the deal’s value.
The Mayfair Approach: Certainty of Close
A sophisticated advisor knows that a high price with a low “Certainty of Close” is a liability. An offer that includes excessive “Seller Notes” (where you effectively act as the bank for the buyer) or vague “re-trading” clauses in the due diligence phase is often just a tactic to tie up your company while the buyer looks for reasons to drop the price.
At David Mayfair, we negotiate for the structure, not just the number. We ensure that when the wire hits, it’s the maximum possible amount of “clean” capital, structured to withstand the scrutiny of both the IRS and the due diligence auditors.
